Could this be the best paper on nominal wage rigidity?

The Indian context is somewhat unusual for understanding the U.S. labor market, but arguably that throws the idea into all-the-stronger relief.  Here is an abstract and paper from Supreet Kaur, who is on the job market from Harvard this year:

Wage and employment responses to rainfall shocks in 500 Indian districts from 1956-2008 provide evidence for downward nominal wage rigidity in markets for casual daily agricultural labor. First, nominal wages rise in response to positive labor demand shocks but do not fall during droughts. Second, after transitory positive shocks have dissipated, nominal wages do not return to their previous levels—they remain high in future years. Third, inflation moderates these effects: when inflation is higher, real wages are more likely to be lower during droughts and after transitory positive shocks. Fourth, wage distortions generate employment distortions: employment is lower in the year after a transitory positive shock than if the positive shock had not occurred. Those with less land—who must sell their labor to other farms—are considerably more likely to face rationing. Landless laborers experience a 7% reduction in employment—twice as large as the employment decrease during a drought. Fifth, there is some evidence that wages are less rigid in areas where rigidity is likely to cause larger profit losses due to crop characteristics. Finally, data from a new survey I conducted in two Indian states suggests that agricultural workers and employers: view nominal wage cuts as unfair; are considerably less likely to regard real wage cuts as unfair if they are achieved through inflation rather than nominal cuts; and believe that nominal wage cuts cause effort reductions.

It is impressive how Kaur focuses on the cross-sectional variation.  You will note, of course, that wage rigidity for established workers is not the same as wage rigidity for the currently unemployed, or wage rigidity for new job market entrants, who also have high rates of unemployment.

Comments

Interesting. His conclusions differ from my own experience in agricultural labor markets dominated by piecework rather than hourly (or daily) pay. Mexican migrant laborers in the southeastern US are accustomed to highly variable pay rates for picking produce. If a frost is coming, they expect to be paid triple. If produce prices have crashed due to oversupply, they either accept a lower piece rate or they move on to another area where a different crop is ready.

There might be some lessons here for the broader US labor market, but none of them strike me as pleasant.

wow, really impressive

Well done Supreet and Tyler!

So is the jury still out in economics whether wages are sticky downwards or not? I always assumed this was an established economic "fact".

Yes, it certainly *could* be. Way to commit.

Downward nominal wage rigidity for currently employed workers may not be the same as for the unemployed seeking work, but they intuitively seem related. It's impossible to keep existing compensation packages completely secret. An applicant knows when you're offering $50K to do exactly the same job someone with exactly the same qualifications is doing for $60K and there has to be at least some reflex to hold out. Heck, I'd even expect reluctance on the part of the employer to offer lower compensation for the same job; you're inviting workplace discord in doing so. I know for certain that nasty situations have arisen in cases where a union contract was renegotiated but existing workers were grandfathered into keeping the more generous prior terms, bringing about a clash between existing workers and new hires. A desire for fairness is extremely basic to our makeup as humans to the extent that even other great apes exhibit the same desire. It predates rationality.

It's a fact.

More world wide and historical evidence on stickyness (it's not a recent phenomenon!):
I. Europe, twenty first century (mind that many of these countries actively tried to lower wages!)
http://rwer.wordpress.com/2011/12/13/this-time-krugman-is-right-lowering-nominal-wages-is-really-really-hard-charts/

II. Friesland, 1600-1850.
As much of an 'Austrian/Graeberian', 'debt as money' economy as you can imagine, including some company owned canals and roads and a land market which was much more 'modern' than, for instance, the english one in the nineteenth century. And a functioning labor market, with 'free labor' (Marxist/Austrian sense). Money wages of boarding labor were downwards flexible, especially after a string of misharvests and the like - but all other wages weren't (which, considering the well known swings in food prices, meant that real wages were). see: Knibbe, M. 'Agricultural productivity in the coastal and inland area of Friesland, 1700-1850' in Olsson, M. and P. Svensson, 'Growth and stagnation on European Historical Agriculture', pp. 83-116.

III. The Netherlands, post 1500.
Jan de Fries and Ad van der Woude give comparable data for the rest of the Netherlands in this period in their "The First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy, 1500–1815.".

Merijn and Rahul,

Not to quibble too much, but downward wage rigidity is not a "fact", but rather a widely accepted tenet with strong empirical support. The value of papers like this derive from the premise that even widely held tenants require extensive testing of the hypothoses under as many real-world situations as possible.

Thanks,

Ivin

>>>a widely accepted tenet with strong empirical support.<<<

That's as close to a "fact" that economics can ever get IMHO.

Nothing against that paper, no harm in re-validating a known result (ok, hypothesis) with stronger proof.

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